Minority Entrepreneurs Struggle to Get Business Loans. This Fund Aims to Fix That

Why you should care

Because investing in small businesses is an investment in the community.

By Laura Elizabeth

The Daily DoseJAN 11 2018

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Adrienne Bennett has a knack for beating the odds. She was Michigan’s first female master plumber and then went on to head up her own contracting company. In 2015, Bennett also fended off competition to win a $600,000 job with Detroit’s gleaming new flagship venue, a $860 million dollar downtown arena. It would be her biggest deal to date, a chance to really put her business on the map.

Funny thing with business, though — they don’t say “You’ve got to spend money to make money” for nothing. Bennett figured she wouldn’t see a penny of her fee until around three months into the job. And yet, to do the work, she’d need to invest in permits, equipment, other operational costs and wages. “We had everything in place: credit lines with our suppliers, all of it,” Bennett recalls. But when she did the math, she realized that, after laying out hundreds of thousands of dollars upfront, “we weren’t sure we’d be able to pay our workers.”

For many businesses, the answer is simple — get a loan to cover cash flow. But as a minority, Bennett knew it wouldn’t be so easy for her. According to analyses of the Fed’s annual Survey of Small Business Finances data:

MINORITY-OWNED BUSINESSES ARE THREE TIMES MORE LIKELY TO BE DENIED LOANS THAN THEIR WHITE COUNTERPARTS.

Not only that, but the data also showed that when minority-owned businesses do secure a loan, they tend to receive a lower amount at a higher interest rate.

Why? There are various explanations. Minority households generally have less wealth, limiting internal investment and external borrowing. This could also affect credit scores. Geographic and societal isolation can cut off minority entrepreneurs from helpful business networks. And then, of course, there is outright discrimination.

The fund is unusual in that it explicitly acknowledges there are racial disparities in access to capital. And it exists to redress problems that snowball from there. One example: Ed Egnatios, a program officer at the W.K. Kellogg Foundation, which helped found the EOCF, explains it was “critical for us to ask how we can assist [minority-owned small businesses] to develop and grow to a level where they hire other people, especially residents of Detroit.”

For example, the ability of small, local businesses to scale boosts whole regional economies — particularly important in a city recovering from bankruptcy.

Bennett says she’s proof the EOCF works. A quick cash injection helped her say yes to the arena project, bring on workers and deliver the job. “Being able to do that one project teleported us to a whole different level,” she says now. “We are getting looked at by contractors that wouldn’t have known who we were two years ago. And we are looking at bigger and better opportunities that we would never have been able to consider before.”

The EOCF has been deemed such a success — with $4.5 million loaned to more than 40 minority entrepreneurs since it launched in 2015 — that the fund has lately attracted new investors and tripled from $6.5 million to $18 million. Based on the Detroit model, similar funds will be introduced to San Francisco and New York this year.

But the problem the fund wants to solve goes far beyond a handful of cities. A 2016 report from the Hamilton Project, which studies fiscal policy, called for better federal funding to help minority and women entrepreneurs nationwide, arguing this could help resolve major social injustices.

“Expanding business formation may help to contribute to reduction of income and wealth inequality,” wrote the report’s author, Michael S. Barr, a professor at the University of Michigan. “Increasing the rate of minority and female entrepreneurship may help to reduce racial and gender wealth gaps.”

Truth is, the entrenched barriers facing minority entrepreneurs are a large-scale problem, and it will take a joined-up approach across public and private sectors to uproot them. The EOCF is a great start. Who now will follow?